Bojangles' (BOJA) CEO Clifton Rutledge on Q2 2016 Results - Earnings Call Transcript

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Bojangles’, Inc. (NASDAQ:BOJA)

Q2 2016 Results Earnings Conference Call

August 8, 2016 5:00 p.m. ET

Executives

John Jordan – Senior Vice President-Finance, Chief Financial Officer and Treasurer

Clifton Rutledge – Chief Executive Officer and President

Analysts

Joe Buckley - Bank of America Merrill Lynch

Will Slabaugh - Stephens

Jake Bartlett - SunTrust Robinson Humphrey

Nicole Miller - Piper Jaffray

Jeffrey Bernstein - Barclays

Christopher O'Cull - KeyBanc

Jeff Farmer - Wells Fargo

David Palmer - RBC Capital Markets

Andy Barish - Jefferies

Sharon Zackfia - William Blair

Operator

Greetings and welcome to the Bojangles’, Inc. Second Fiscal Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. John Jordan, Chief Financial Officer. Thank you, you may begin.

John Jordan

Good evening and welcome to the Bojangles' Inc. quarterly conference call. I’m John Jordan, Chief Financial Officer, Senior Vice President of Finance and Treasurer, and with me today is Clifton Rutledge, Chief Executive Officer and President. By now, everyone should have access to our earnings release for the 13 week period ended June 26, 2016. It may also be found on our Web site at www.bojangles.com under the Investors section.

Let me begin by covering a few regulatory matters. During our formal remarks and in our responses to your questions, certain items may be discussed which are not based on historical or current facts. Such items including statements indicating our beliefs, trends, plans, expectations, assumptions, anticipation, guidance, projections, estimates and the like, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are inherently subject to risk, uncertainties and assumptions, are not guarantees of performance and are expressly qualified in their entirety by cautionary statements.

In addition, all forward-looking statements speak only as of the date of this conference call. We undertake no obligations to update or revise publicly any forward-looking statements whether as a result of new information, future events or otherwise, other than is required under the federal securities laws. For more details please refer to our earnings release and to the risk factors in our SEC filings.

In addition, our remarks today will include references to restaurant contribution and restaurant contribution margin, EBITDA and adjusted EBITDA, adjusted net income and adjusted diluted net income per share which are all financial measures that are not defined under Generally Accepted Accounting Principles. Investors should review the reconciliations of these non-GAAP measures to the comparable GAAP results contained in our earnings release.

Our agenda today is as follows. Clifton will provide some introductory remarks and commentary on our key business strategies. I will then walk you through the financials for the second fiscal quarter of 2016 and discuss our fiscal year 2016 guidance. Clifton will then conclude our prepared remarks with a few thoughts before we open the lines for your questions. And with that, I will turn the call over to Clifton.

Clifton Rutledge

Thank you, John and good evening everyone. We appreciate you joining us again this quarter as we report or most recent progress and thank you for your interest in our growing company. As I am sure you can tell from our second fiscal quarter earnings announcement, the Bojangles’ brand are one of the kind hospitality and our menu of southern inspired favorites continues to resonate with customers every single day.

Communities across the southeast and our growing adjacent markets are enjoying the unique flavors and value that comes with the Bojangles’ experience. John will share more detail later in the call when we does a deeper dive into our recent financial performance. But however, I will say that our second fiscal quarter numbers and our consistent record of performance is a testament of our growth strategy and leadership. Most importantly, we are developing our Bojangles’ brand the right way, using a measured approach that is a long-term oriented and sustainable.

Everyday team members at company-operated and franchise locations across our growing systems are in our restaurants working to provide our customers with that reliable one of a kind Bojangles’ experience and that efforts are paying off. Bojangles’ is unique brand and is a growing force in the fast, casual and QSR space. We continue to be pleased with the overall new unit performance in both our core and adjacent markets and in the enthusiasm and dedication to the Bojangles’ brand that I have seen across this organization including our franchisees over this past year, has been inspiring. I believe it will continue to fuel our success growth.

Now as I said earlier, we are pleased with our second financial quarter -- excuse me, fiscal quarter financial results. I would like to draw your attention to several items. We have now achieved 25 consecutive quarters of system wide comparable restaurant sales growth. We opened 18 restaurants of which 7 were company-operated and 11 were franchised. We increased total revenues by 9.2%, adjusted net income by 17.3%, and adjusted diluted net income per share by 17.4%.

Our plans are working because our restaurant leadership teams are enthusiastically focused on our growth strategy, our goal of operational excellence and our commitment to creating the best customer experience possible at all Bojangles’ restaurants. Bojangles’ team members are in the communities we serve day in and day out, helping to open new restaurants and connecting with local community organizations, sharing that one of a kind Bojangles’ experience that makes us a fan-favorite across our footprint. Our franchise network is growing as well. Bojangles’ franchisees are building restaurants in existing markets as well in new adjacent markets. And I simply cannot stress enough, how excited we are about the growth we are experiencing in our adjacent markets.

The average unit volume for system wide, full-sized units in adjacent markets exceeds $1.45 million, which we believe is higher than many of our competitors' national average. We are on target to meet our stated long-term goal for unit growth in the 7% to 8% range, and our development pipeline for company and franchise restaurants continues to remain strong with approximately 100 sites approved or under-construction. Currently, we have over 250 restaurants in our adjacent markets and view our adjacent markets are a long-term growth driver of our brand, we expect more than 70% of or new unit growth will take place in the adjacent markets.

In addition, our franchisees continue to demonstrate they believe in our brand by opening more restaurants and expanding their business relationships with us. Now you have heard me on several occasions speak about our commitment to creating the best customer experience possible at Bojangles’ restaurants. And as a part of that initiative, we plan to make significant investments in our people. But make no mistake about it, we are not naïve. We are aware that there are labor pressures on the horizon. However, as we continue to drive towards operational excellence, we realize that we must get there as a team, preparing every team member for success and opportunity.

So in the coming months, you will see us ramping up our service and hospitality efforts. We will strategically add labor where needed, such as table service or more full time versus part time workers. We believe it will make a significant impact over time. We believe strategic labor investments will increase restaurant level training opportunities, help introduce the brand to consumers in new markets, assist with launching new mobile technology like online ordering, help create more awareness for new products in local markets, and insure our restaurant hospitality levels match the high quality of our food.

We see strategically adding labor in the appropriate situations and locations across our company restaurant, we see that as a positive. We see it as a clear opportunity to continue to differentiate ourselves in the marketplace. This is the perfect time for us to take our Bo-Size and Star Service hospitality initiatives to the next level. Our consumers expect it and I will tell you that we are dedicated to providing it.

Now at this point, I would like to shift gears a little and give you an update on several of the items I shared with you on previous earnings calls. First, our marketing department has been hard at work sharing the Bojangles’ experience with customers across our footprint. I know many of these celebrate a National Buttermilk Biscuit Day with Bojangles’ in May, a National Ice Tea Day with a free cup of our Legendary Iced Tea in June. And our marketing team took the Legendary Tea-Mobile to the Caroline beaches and gave fans free tea all day.

The social media following was great and I hope you had an opportunity to catch it. And also, by the way, it's still the summer of tea at Bojangles’, so our customers can go about one of our participating locations and purchase a 32-ounce Legendary Iced Tea for $1 through September 5.

As I mentioned before, our marketing teams plan to strategically leverage appropriate calendar occasions that are complementary to Bojangles’ signature menu items, very much like we did on Valentine's Day and National Pie Day. As a reminder, our brand positioning centers on, on [indiscernible] what makes our food and the Bojangles’ experience so unique and distinctive. Our original southern recipes and the simple goodness of a hometown experience, customers will not forget. And a perfect example of experience customers can only get from Bojangles’ is our random acts of Bo-initiative, which continue this quarter with the release of Vending Machine. In this original digital short, our team took a hollowed out vending machine, delivering it to a Laundromat, the instead of customers receiving a candy bar or a premade sandwich, they were surprised with fresh Bojangles’ Cajun Filet biscuits, Chicken Supremes, Roasted Chicken Bites, Seasoned Fries, and of our course our Legendry Iced Tea, being handed out by a person inside the machine.

This adds to our collection of previous digital short films in which we surprised students taking exams at UNC Charlotte and travelers to the Charlotte Douglas International Airport with Bojangles’ at the baggage claim area. To see all these videos, visit our newly revamped Web site at www.bojangles.com. And we will continue to focus on engaging with our customers through social and digital media in fun and interesting ways.

Also, our local marketing folks are on the ground in cities across our footprint including our adjacent markets, working to generate excitement for the brand and playing a critical role in the growth of our organization as part of our new restaurant opening process. Local store market engagement is an important part of what makes our brand to special to our fans and we appreciate the hard work that these marketing professional are doing every day. Our marketing team is well into the planning for the NASCAR Sprint Cup Series, the Bojangles’ Southern 500 that will take place on September 4 at Darlington Raceway in Darlington, South Carolina. As always, we are excited and energized to get back to Darlington again this year where we always see great fans and followers while enjoying some of the best racing on the series.

Moving on to our operations side of the business and our food. I can't stress enough, our team members actually cook inside our restaurants and there no microwaves used in the preparation of our food. As a matter of fact, there are no microwaves in any of our restaurants. The result is freshly made, high quality food that is unique and affordable. Products like our Cajun Pinto Beans, our green beans, creamy coleslaw and Dirty Rice, as well as our famous chicken, Roasted Chicken Bites and one of a kind Seasoned fries and of course, our made from scratch buttermilk biscuits.

We will continue to leverage the popularity of our core products and develop exciting new extendable platforms while the raising the bar on quality and uniqueness across the menu. As I have mentioned before, menu innovation remains an important part of our game plan going forward as we solidify our reputation for unique, great-tasting, freshly made food at an exceptional value. In the coming months we plan to launch a new product. We are very excited about it and anticipate it will really resonate with our fans. More to come on this product soon but I will say this new offering will exemplify the menu innovation you can expect to see coming from us in the future.

Our Kitchen of the Future and ultimately Bojangles’ of the Future projects are going extremely well. We remain excited about what we are seeing with these initiatives and look forward to moving both out of the testing phase very soon. But an important part of these projects is the integration of technology. We continue to explore technology solutions that will elevate the customers experience at our restaurants, like mobile payment and mobile and online ordering, and we will make progress on that front. And again, as I mentioned earlier, we are committed to creating the best customer experience possible at all our restaurants. And as part of those efforts, we plan to make investments in our people.

While working together with our franchisees and team members at every level of the organization, we are taking this nearly 40-year old growth company into the next phase of its evolution, better prepared than ever for the bright future that lies ahead. Working from a solid foundation of high quality food, strong customer service and giving back to the communities we serve, we are enhancing the best that we are while creating exciting opportunities and new possibilities. I am so excited about the future of this company and the many opportunities ahead of us.

And now with that, I will turn the call back over to John, who will cover the financial portion of this discussion.

John Jordan

Well, thank you, Clifton. Let's begin with development. As Clifton said, there were 18 system-wide restaurant openings during the second fiscal quarter of 2016 which included 11 franchised and 7 company-operated stores. The system-wide restaurant count as of June 26, 2016, consisted of 295 company-operated restaurants and 394 franchised restaurants for a total of 689 locations. This reflects a net increase of 43 restaurants from the second fiscal quarter in the year ago or approximately 7% growth.

For the second fiscal quarter of 2016, system-wide comparable restaurant sales increased 0.2%, consisting of company-operated comparable restaurant sales growth of 0.9% and a franchised comparable restaurant sales decline of 0.2%. The two and three year stacked system-wide comparable restaurant sales growth for the second fiscal quarter were 4.6% and 8.8% respectively. For the second fiscal quarter of 2016, our total revenues were $131.6 million, representing an increase of 9.2% compared to $120.5 million in the same period last year. The increase was primarily due to a net additional 43 system-wide restaurants at June 26, 2016 compared to June 28, 2015 along with the comparable restaurant sales growth at our company-operated restaurant which offset a slight comparable restaurant sales decline at our franchised restaurants.

Company restaurant revenues in the second fiscal quarter of 2016 were $124.7 million, representing an increase of 9.3% compared to $114 million in the same period last year, primarily due to the aforementioned increase in company operated comparable restaurant sales and a net additional 28 company operated restaurants year-over-year. Company operated comparable restaurant sales growth was due to increases in price and transactions which offset a decline in mix. Comparable transactions at company operated restaurants increased 0.5% for the second fiscal quarter of 2016 compared to the second fiscal quarter of 2015.

Franchise royalty revenues for the second fiscal quarter of 2016 were $6.6 million, representing an increase of 4% compared to $6.4 million in the same period last year, due to a net additional 15 franchised restaurants year-over-year partially offset by a reduction in franchised comparable restaurant sales of 0.2%.

Moving on to our four wall operations, beginning with company operated store level profitability. Restaurant contribution was $24.5 million, representing an increase of 12.3% compared to $21.8 million in the same period last year. Our restaurant contribution margin increased from 19.1% in the second fiscal quarter of 2015 to 19.7% in the second fiscal quarter of 2016.

Food and supplies cost as a percentage of company restaurant revenues decreased to 31.3% in the second fiscal quarter of 2016 compared to 32.2% in the same period last year due to menu price increases and lower commodity cost. Company operated restaurant labor cost as a percentage of company restaurant revenues increased to 27.7% from 27.3%. This increase was primarily driven by an increase in direct labor, partially offset by lower medical claims, incentive compensation and payroll taxes. We expect our restaurant labor cost will continue to increase due to the tightening labor market as well as certain labor initiatives across company operated restaurants, including the expansion of our table service and potentially increasing the number of full-time versus part-time team members a Clifton discussed earlier.

In addition, we expect our restaurant labor cost will increase as a result of the newly enacted Department of Labor regulations related to overtime and exempt versus non-exempt classification that are scheduled to become effective December 1, 2016.

Operating cost as a percentage of company restaurant revenues were 21.3% in the second fiscal quarters of both 2016 and 2015, as higher occupancy and utilities cost were offset by lower marketing cost. Restaurant depreciation and amortization increased approximately $400,000 to $3.1 million compared to $2.7 million in last year’s second fiscal quarter, due primarily to the increased number of company operated restaurants as well as the depreciation of our new point of sales system. As a percentage of company restaurant revenues, restaurant depreciation and amortization increased to 2.5% in the second fiscal quarter of 2016 compared to 2.4% in the same period last year.

General and administrative expenses decreased 19.8% to $9.4 million from $11.7 million, primarily due to $1.8 million in cost directly related to public offering expenses that were incurred in the second fiscal quarter of last year, $800,000 in lower stock-based compensation expense, primarily related to vesting of certain performance awards last year and $400,000 in lower meetings and convention expenses due to our billion-annual franchise convention and unit director leadership conferences occurring during the second fiscal quarter of last year. The benefit of not incurring these costs again in the second fiscal quarter of 2016 were partially offset by positions added to support an increased number of restaurants in our system and additional cost as a result of operating as a public company.

As a percentage of total revenues, general and administrative expenses were 7.1%, down from 9.7% in the second fiscal quarter of last year. Adjusted EBITDA which excludes the impact of certain items we do not consider representative of our ongoing operating performance and certain non-cash items, increased 12.9% to $23.2 million from $20.5 million. Attached to our earnings release are reconciliations of our GAAP net income to our adjusted EBITDA.

Interest expense decreased to $1.9 million from $2.2 million in the prior year second fiscal quarter, reflecting principal payments of $33.2 million on our term debt year-over-year and a reduction in our applicable interest rate, partially offset by an increase in the LIBOR rate in interest expense associated with interest rate swaps year-over-year.

Income taxes increased to $5.8 million from $4.4 million in the prior year's second fiscal quarter. In the second fiscal quarter of 2016, our effective income tax rate was 36.7% compared to an effective income tax rate of 41.2% for the prior year's second fiscal quarter. Last year our effective income tax rate impacted by cost related to our initial public offering that were not deductible for income tax purposes.

On a GAAP basis, net income increased 58.4% to $10 million in the second fiscal quarter of 2016 from $6.3 million in the second fiscal quarter of 2015. On a non-GAAP basis, adjusted net income grew 17.3% to $10.1 million in the second fiscal quarter of 2016, compared to $8.6 million in the second fiscal quarter of 2015, while adjusted diluted net income per share grew 17.4% to $0.27 from $0.23. Attached to our earnings release, are reconciliations of our GAAP to adjusted results.

Now for our updated fiscal 2016 outlook. As a reminder, fiscal year 2016 is a 52-week period that ends on December 25, 2016. We now expect total revenues of between $530 million and $533 million. This compares to our previous range of $535 million to $543 million. We now expect system -wide comparable restaurant sales growth of flat to low single-digits, compared to our previous guidance of low single-digits. Our preliminary system wide comparable restaurant sales increased 0.7% for our July fiscal period. For the first six weeks of our third fiscal quarter, preliminary company operated comparable restaurant sales decreased 0.5%.

In terms of development, we still intend to open 60 to 65 system wide restaurants, reflecting net unit growth of approximately 8%. The breakdown which remains unchanged is as follows. 28 to 29 company operated restaurants and 32 to 36 franchised restaurants. We expect new company operated restaurants opened in the third fiscal quarter to be open approximately one-third of the fiscal quarter and expect revenues to be negatively impacted by approximately $300,000 to $400,000 due to two restaurants being scraped and rebuilt. Net increase in system wide restaurants is projected at 53 to 58, of which 26 to 27 are company operated restaurants and 27 to 31 are franchised restaurants. Restaurant contribution margin is still projected between 17.7% and 18.1%.

Total general and administrative expenses are now expected in the range of $39 million to $39.5 million. This compares favorably to our previous range of between $40 million and $41.5 million. We now expect adjusted EBITDA of $83.5 million to $85.5 million, compared to our previous range of $84.5 million to $86.5 million. And finally, we now expect adjusted diluted net income per share between $0.88 and $0.92 compared to our previous range of $0.89 to $0.93.

With that, let me turn the call back to Clifton for some concluding thoughts.

Clifton Rutledge

Well, thank you, John. We will happily take your questions in a moment, but first let me leave you with the following thoughts.

The plan that we are executing is demonstrating tangible beneficial results for our growing system and company operated and franchised restaurants. We continue to work hard during these highly promotional and softer industry environments and address sales opportunities to great tasting, freshly-made products and innovative marketing. These efforts are designed to foster greater brand awareness and create more Bo-fanatics.

We are making selective investments in operations by enhancing our service models and involving how we meet customer needs. In doing so, we will take Bojangles’ hospitality to the next level, further differentiating ourselves from our peers in this process. And as always, I must thank our Bojangles’ teams at the company and franchise locations who work hard every day providing our customers with a consistent, high quality restaurant experience. They are the reason why we have been able to establish a track record of performance. Please note that your efforts are always appreciated.

Thank you for listening. Operator, please open the line for questions?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Joseph Buckley from Bank of America. Please go ahead.

Joe Buckley

John, can I ask to repeat you what you said about the quarter to date numbers. I think you gave a July number that, maybe was for the system, and then a six-week number for the company-operated comps.

John Jordan

Yes. So for the system for July, which was a four-week period, system same store sales increased 0.7% and for the first six-weeks of the third fiscal quarter, if you look at just the company alone, the company decreased 0.5%.

Joe Buckley

Okay. And any thoughts on kind of that disparity, anything special driving it that you are aware of?

John Jordan

Well, Joe, when you look at it, obviously, the company and franchise, we sort of flip back and forth from time to time. You know in the second quarter the company performed better than the franchise but the franchise were comping to get the harder of the company and still outperformed us in the first part here of the third quarter. Part of that could be due to our barbecue sandwich that we rolled out last year in July. Not all of the franchise community participated in that. The company did and of course they have made that a permanent menu item. So that could be part of it. The second things that could also be a part of that is, company pricing has fallen. It was about 1.7% in Q2 and Q3 it's dropping to the 1.4% range or so. And franchisees possibly have taken more pricing than company. We don’t have any stats to be able to back that up but that could be part of it.

Joe Buckley

Okay. And just one more, a bit broader question. Talking about restaurant level margin, obviously you are making an investment in labor, if you could put numbers around that, that might be helpful. And then are you assuming the pricing factor continues to run off for the balance of the year?

John Jordan

Okay. So on the pricing for right now, in Q3 it's roughly going to be in that, say, call it 1.4% range. We are currently evaluating pricing right now. We actually are meeting with our third party firm that we utilize and we will be making some decisions in the near-term. We are considering taking pricings, maybe towards the end of the third quarter, beginning of the fourth quarter, maybe towards the end of the September period. But we haven't made a decision on that end. As far as the labor investment, so I am really going to break it down into two things. The first thing is the regulatory environment.

Preliminarily, we have decided that we are going to keep all of our unit directors salary and so as a result of that, that’s going to cost us about 25 to 30 basis points of sales and we expect to reflect this in our next pricing. When you look at our assistant unit directors, currently, we preliminarily are going to have to convert them from being a salaried employee to an hourly employee. And so there I think what our biggest concern is, is just the morale of converting those employees from being a salaried person to an hourly team-member and then also they will have to do a lot more tracking of overtime because the overtime can become very expensive very quickly.

As far as the other initiatives that Clifton mentioned, such as increasing our table service and potentially increasing more full time versus part time team members, we are still evaluating the impact of what those labor investments are going to be. However, it's our intent obviously, to be able to cover some of that through some pricing potentially, some of that maybe through some of our commodity savings that we have been seeing. And then also, you know obviously return on investment through increased sales. But some of these will be more longer-term investments to be able to pay off on service over the long-term. So that’s what we are sort of looking at right now.

Operator

Thank you. Our next question comes from the line of Will Slabaugh from Stephens Inc. Please go ahead.

Will Slabaugh

I wanted to follow up on the guidance. Given the slight tweaking you made, I am curious with the lowering of the numbers, how much that had to do with the labor investment that you are talking about now as opposed to what's sounds like different slightly flowing trends to start this quarter off. If you could sort of frame up what percentage you would allocate to each?

John Jordan

Yes. I think probably the biggest impact certainly was, probably, we bought the revenue range down from the $535 million to $543 million down to the $530 million to $533 million. So that certainly has an impact. And then also then the labor also, as you can see our labor was up in the second quarter as a percent of sales and with where we are and with the regulatory and with the investments we are going to make, we don’t really could see any relief on that going forward and we think that that labor will continue to go up. So it's a combination of those two items..

Will Slabaugh

Got it. And a quick follow-up, if I could, on the labor. Is there any market that you have tried this already, put this into place where you have been able to share some feedback from either employees at the restaurant level or at the supervisory level to say, sort of, how you feel like it might go over. Just taking some guys to salary or taking some guys off of salary and what that might do to both overtime and to turnover.

Clifton Rutledge

Well, let me explain in two ways. We have not taken anybody off of that yet. That is something still to come because we want to make sure that, as John mentioned, the morale part of it is more the issue there that we are concerned with, that how we communicate. On the service model, we have that approximately in about 60% of our stores today. And what we have seen from that, again, as you tie that back into SMG, which we put in two years ago, you are seeing about a two-tenths of a percent even in this volatile timeframe we are in for sales. But, again, we will strategically put that out there but you also, you can't be doing digital and all these other things that we are wanting to without people. You have got to invest in the people. So we have tested it. The great thing about it is, for us, is that it does enhance, specially as the services of what we are trying to put out there for our brand as we go forward where our service matches the quality of our food, but it's about 60% of our stores as of today.

Operator

Thank you. Our next question comes from the line of Jake Bartlett from SunTrust Robinson Humphrey. Please go ahead.

Jake Bartlett

My question is about the same sort of sales throughout the quarter. It seems like, I know from your last guidance it was roughly flat in the first month and then Q2 has improved towards the back half and then fallen back down. I would have expected the $1 tea to kind of help towards the back half or the last month of the quarter, then continue to help in the third. If you can just talk about why you think you are seeing the deceleration? Again, has the promotional environment gone worse? Is the LTO or the promotion kind of running out of steam? I think you had it for three months this year versus one month last. And then I have a follow up.

John Jordan

Yes. So to sort of walk you back through the second quarter without really getting granular to the exact numbers for each month. I will state that June was our best month in the second fiscal quarter although it was not what we expected. It was lower than we expected. And then going into July, we certainly saw some additional softening, and on the company side since we have six weeks, we saw some softening there that we sort of mentioned. I think that when you really looked at it, in the second fiscal quarter we were thrilled that our company-operated comparable restaurant transactions increased to 0.5%, so more customers were coming into our restaurants and so we think of that as a very positive. But there is certainly no doubt that it appears the consumer softened some in our space and one of the things that we have seen is, we are seeing negative mix. So our mix has gone negative and that’s having some impact.

And then we also think that there is possibility with the lower grocery prices, that could be having an impact. People spending on other categories. There has been some, obviously, weather impacts throughout different parts of the country. And then even potentially the negativity from the political environment maybe having some. The one interesting thing I think that we will point out is, is that when you look at our dayparts, year-to-date for the first half on the company-operated restaurants, we were positive at all dayparts except breakfast, and at breakfast we were only negative 0.2%. Also in transactions we were positive for the first half for company restaurants at all dayparts except breakfast.

However, in the second fiscal quarter, we saw breakfast down about 2.3% on the company operate restaurants. All the other dayparts were positive and we continue to see some softness at breakfast into third quarter and we have seen that spread a little bit to the lunch daypart as well.

Jake Bartlett

Okay. And just a comment on that. From my perspective, I think a little bit surprising because I would have thought that your breakfast daypart you would have had the most loyal team, much more of sticky, more established daypart for you. So I am surprised that that’s where you are seeing the weakness. But I had a question on just also your broad guidance for the back half of the year. And if I do the math, it looks like it implies about negative 1% to positive 4% in the back half. Pretty wide range. Can you maybe help us narrow it down a little bit, for instance, do you expect [indiscernible]?

John Jordan

Well, I think if you look at the revenue, again, we don’t really give quarter by quarter guidance. But I think if you look at it, it would be a slightly negative to slightly over 1% comparable restaurant sales growth in the last six months of the year to get to that revenue guidance. So think it supposed to be slightly negative to a little over 1% positive.

Clifton Rutledge

And let me speak to the breakfast piece of it. I mean as you look at the landscape that’s today and you look at this year versus last year and our footprint, I mean everybody now is into breakfast. It wasn’t until October really that McDonald's came out with their all-day breakfast which we have been doing for 40 years. But there are so many other people that are now in the breakfast game, whether that is a convenience store, other companies that just were not selling breakfast at this time last year. There is only so many pieces of the pie. For us to be down just a little bit in that, I will take that especially. And we will get that back as we go forward but again, for all of our other day parts to be positive and some of them really positive, I will take that as well.

And again, the breakfast is our mainstay and that will come back over time but, again, the environment has changes. Just from all of our 12 states that we are in, there are more people serving breakfast today than ever before.

Operator

Thank you. Our next question comes from the line of Nicole Miller from Piper Jaffray. Please go ahead.

Nicole Miller

I appreciate all the commentary. I am not sure I am still quite clear on what's driving the negative mix. I understand the dayparts but could you talk the mix specifically and is that something that would change? How would that change in the back half of the year, if at all?

John Jordan

Right. So the mix is really a combination of items. So number one is, there have been some periods we have been a little more promotional, especially in our adjacent markets. We also ran our dollar, 32 ounce tea longer this year. Last year we ran it only in the July fiscal period, this year we started it on June 11, which was probably about two or three weeks earlier and we are going to run it all the way to labor day. The other thing that we have also seen is, is when we have been doing some of our promotional items, we have seen that customers are not going towards the promotional item or doing the bundling as much, like two-fours, that’s been down a little bit. And so they are buying the less bundled items. And then also in the May period, we had a mismatch in promotion period, so last year in May we did two Country Ham biscuits for $3.33. This year we did a smoked sausage for $1.29. And so that was a pretty big mismatch on average ticket. So I think it's a combination of multiple items that are causing that mix change. And we really saw mix negative towards the last part of last year and it stayed negative now for several quarters.

Nicole Miller

Okay. So it sounds like with the exception of the mismatch, some of those things might continue. Is that the right way to think about that?

John Jordan

I think probably, I think, yes. I think that right now as long as we stay in this competitive environment, I think that that is probably, mix is going to be an item that’s going to struggle to stay, get to positive, in this environment. So I think that you could probably think, we don’t like to give guidance on mix but I think that it's going to always stay negative for a while.

Clifton Rutledge

Nicole, I would hope that it would change. I mean for me to see that the traffic is positive which as I look at the true health of our company, and we don’t aggressively -- yes, we do some discounting across our system but it's not a broad brush stroke everywhere. It just, what it is telling us though that they are spending less money. For whatever reason that that maybe, they are still coming to us but they are spending less and we have seen that for quite some time. But, again, on the positive side of that, it's very encouraging to see that our traffic is staying positive through this choppy waters that we are going through.

Nicole Miller

I appreciate that and I actually don’t want to overlook that as I ask my next question. Maybe, do comparisons ease as you exit the third quarter or get more difficult because the comment you just made, I am trying to reconcile that still and I know it's been asked but to the way that you have guided, or guided comp now for the remainder of the year. So do comparisons get more difficult in this third quarter?

John Jordan

So when you look at it right now, last year the company franchised and system were up 4.1% and, obviously, the fourth quarter we were comping more in the 0.6, 0.7 range. But of course we were going against a very strong fourth quarter from the prior year, so when you look at two year stacks. And so I think what we are really taking the approach right now is just based on where we see the last, say six weeks on the company side. We are taking a more cautious approach based on where we see are and what we are hearing a lot of other people in the industry. And certainly you know, we hopefully do a lot better than these numbers but we are just trying to be realistic with where we are right now.

Nicole Miller

And just to put in the little bit finer point to it, the 4.1% last year third quarter, what was the best and/or worse month so then that might give some context here.

John Jordan

Yes. The hardest or the best month was July. And for the company operated restaurants, July and August look real similar and September it was our easiest we were going against. The franchise, their best was July and then August and September were relatively close.

Nicole Miller

And just a final question, if I may. Talk just a little bit about the table service. I think it's very interesting. How many people are eating in and what's the average check like? What's the real advantage that you will have as you execute one something like that?

Clifton Rutledge

So I mean there's several things there for it. We are using the word table service but I think it's better to say enhanced service that as we are competing in the landscape that we compete against, whether that’s [Chipotle] [ph], which is the standard barrier in our industry or McDonalds. As you take that service level to the next stage, that can be all, it's not just inside but outside, from a grassroots perspective. Whether that is adding tablets and doing line busting and all those things to get people quicker food through the lines. But the bigger part of this is, if you look at it in steps, I mean we want to do mobile and we want to be able to do mobile ordering. And so that’s a whole another operational model. While I can turn the technology on tomorrow but if it's a train wreck in the restaurant then we want to make sure that is all set and in place before we get to those things where we can turn those on.

But it is just a step-up basically of what we are trying to do versus at the front counter. You carry that through the lobbies and also out to the drive-through. We are still about, 60% of our company is in -- of our business is drive-through and the rest of it is inside. But as we go forward to the Bojangles’ of the future that will be tested later this quarter, excuse me, fourth quarter, and then we start to roll those out in the future. That we want that to become, keeping that 60% through the drive through but getting more people inside. And the only way that I see and we see to do that is upping that service level, upping that experience of what takes place. And we are doing it at a measured pace that’s why it's not rolled out everywhere. We are doing that little by little, so we don’t destroy the P&L first of all. We are getting some payback on it but that is more of a long-term with all the other initiatives we have got from 2017 and 2018. I don’t know if that answers the question for you, Nicole, but that’s the best way I know how to break it down.

Operator

Thank you. Our next question comes from the line of Jeffrey Bernstein from Barclays. Please go ahead.

Jeffrey Bernstein

Two questions as well. Just one, Clifton I think you mentioned in your prepared remarks, the promotional environment is obviously getting more intense and the industry is softening. So whether or not it's due to the promotion of your peers or whether it's due to the macro factors you mentioned. Just wondering, how you think about Bojangles’ response to something like that. I feel like in the past you had mentioned you are really not planning on changing your strategy at all. So I am just wondering, as this goes on for a longer period of time, whether there is maybe a more of a competitive response that Bojangles’ might take to protect their share. And then I have a follow up.

Clifton Rutledge

Yes. I mean I think we are not going to go full board and do it system-wide. I mean we are going to continue what we are doing right now and where that is in selective markets. It's more in the adjacent markets than what you are seeing in the core but it is. I mean the competitive landscape, whether it is the amount of stores that competition is being built, you are seeing that as high as I have ever seen it in a long, long time. But then the promotionals that come with that. They have not died down. They are still there and in some cases even getting stronger. And so we are not going to try to bite that, we are going to do where it's the right way to do it. And again, if we need to do something, then we have got the ability to turn that on and we can do things similar like we did last year in December or in January. But we feel good about our plan on what we are going. And, again, with the numbers that we are showing on exactly where we want to see, where nobody is right now exactly what we want to see, but we are not going to just follow suit to this discount just because everybody is doing that.

As long as our traffic can stay positive with our food and what we serve, and our customer service to back that up, then we will come out of this, at the end of this, when everything comes back around, better than we were before. So we will dabble in that but we are not going to go full board into discounting.

Jeffrey Bernstein

Got you. And then just my follow up question with regard to, we have talked a little bit about labor and commodity here, but I think last quarter to your labor, basically you were still thinking in the low single-digit wage inflation. So I am just wondering, what that might ramp up to in the back half of the year and going into '17? And similar on the commodity front, I think you said the commodity basket was lower in the second quarter and your prior guidance was flat for the full year. So just wondering, the trajectory on the commodity front and then similarly on the labor front from an inflation standpoint?

John Jordan

Yes. So on the commodity side of the fence, we initially had expected to start to maybe see our commodities go up in the second half of the year. But after seeing where we came in in the second quarter, which we had deflation in the second quarter, probably about 1.5% on our basket, we would now probably expect Q3 and Q4, the rest of the year, to be slight deflation to flat. And so that’s sort of what we are looking at now for the second half. On labor, what's interesting you know, obviously we are still not impacted the same way that the minimum wage increase states and jurisdictions are. So when you look at actually our, the rate per hour pay, it's probably still in that low single-digit range. But where you are going to see the increase some is through these investments that we have talked about, which is actually adding more hours. And then also due to the regulatory environment where we are going to have this 25-30 basis point increase due to the overtime rules and been having to work through the morale issue of our existing assistant unit directors and the over time situation there.

Jeffrey Bernstein

But you feel comfortable, I guess, with the pricing discussions that you mentioned and maybe taking price in September period that in this environment, where the comps are a little lighter. You would be comfortable, you still feel like you have the pricing to offset some of that labor pressure.

John Jordan

I think some of it.

Clifton Rutledge

I think some of it. We are going to, [indiscernible] are coming in this week for us to discuss that. I mean that’s something that we got be very careful with. Because of what you are seeing in the grocery stores and there is a lot of that and I am sure you all can look at just like I did. The restaurants have typically taken 2% to 3% for [indiscernible] on price. But in this environment that we are in today, it's going the other way in the grocery stores. And so that’s something that we got to be careful on. So it's something we will be very measured on from a price standpoint. There will be some we have to take. How much, that’s still to be determined.

Operator

Thank you. Our next question comes from the line of Chris O'Cull from KeyBanc. Please go ahead.

Christopher O'Cull

My question is just regarding the guidance. John, obviously the guidance implies, actually flat to down earnings in the back half of the year, after you guys grew it quite healthy in the first half with roughly 1% comp. So I guess my question is, can the company grow its earnings with 8% unit growth and also what comp is needed to be able to grow your earnings in this environment.

John Jordan

Okay. Great question. So the answer is, yes, we can grow our earnings with that and we certainly have over a long period of time. I think that, obviously, probably what's changed right now is in the short run, is these labor investments that we are making and some investments you know in some other areas like our depreciation last year with our new POS system and some of those things increasing. So the answer is, yes, but I do think that it's always important to note that obviously same store sales come with one level of profitability and new stores come with a level of profitability. And generally the same store sales, we had 25 consecutive quarters of same store sales growth. Right now we are little bit of a flatter same store sales. Still positive, but a little flatter in the second fiscal quarter. And so I think that a lot of that, we certainly need to continue to grow same store sales in our existing base.

Clifton Rutledge

I will just add one thing to that Chris and I want to make it very clear. We do things on a measured approach and we look at the long-term, not the short-term. And I understand your question and why you would say that but of all the initiatives, whether it's us or anybody that’s got to put in place, you have to have people. And you got to have the best trained people. And right now because of the tightening of all that, you want to do everything you can to keep what you have got but then also to be able to extend that as you go forward. So we are not looking at this for quarter three for quarter four, even the first quarter of next year. This is a long-term approach that is based on many different things that we are layering in. Whether that’s Bojangles’ of the future, whether that’s new [flocks] [ph] or whether that is digital menu for the media being able to order online, mobile ordering and all those types of things.

You got to build that first versus turning on and hope it works when they get in there. The last thing we want to do is to have a train wreck in our kitchen because we have turned something on just to try to drive sales in that quarter. We want to be prepared first before we go out into those sites.

Christopher O'Cull

No, I appreciate that. Regarding the service model and some of the investments you are talking about around labor. Can you help us prioritize, kind of the level of investment among these different things around moving more towards full time employees, the over time ruling, the table service. And then maybe also, Clifton, can you remind me, what percentage of the stores today offer table service and can every company and franchise store implement table service?

Clifton Rutledge

Yes. Let me do that first and then we will go into some of the numbers side of that. About 60% of the company stores have that in today. If you look at the franchise side, we asked them to test this with us and we started off with about 10 to 12, that’s up to probably 45 or 50. Some of our franchisees have already been doing it. Some of our larger franchisees have been doing some form of that type of service for a long period of time and we have adopted that to some of what they have been doing. So it's not 60% and we will, like I said, stagger. It's not going to be we are going to turn all at one time, even on the full time people that we take that out to. We have seen that having those full time people, especially at breakfast, because our traffic is so high and the repeat business is Monday through Friday and even on Saturday and Sunday, having that same cashier or that same master biscuit makes or that same person on the front line is important because they get to know them.

Well, because of what's taken place with the overtime and ACA in the past, you had to cut those folks back to that was below 30. Well, now, they are working two jobs. Well, we want them to be able to only work one job and that’s with us. And so that will be a measured approach as well as we go forward as we go to more full time employees, especially during those key dayparts for us, like breakfast.

John Jordan

And when it comes to the cost, you know as we have mentioned on the exempt, non-exempt over time rules, just on our unit directors alone, that’s going to be about 25% to 30 basis points of sales. And of course that has to be in place by December 1, so you are probably looking at sometime in the November timeframe probably when you will start to see that hit. And then when it comes to the full time equivalent, there you really have two things you have to evaluate. One is medical insurance because they would then become eligible for that and then number two is the full time people that you are adding, what hours are you reducing. Because the hours would be same, we are just adding a full-time person but it could be at a higher rate than what the hours that are being reduced. So that’s what we are trying to evaluate. We are hoping that it will be somewhat neutral but we are still having to evaluate that.

And then as far as for the table service, really the objective of table service is to cover about six hours a day, three hours at lunch and three hours at dinner. Those are the two segments we are really trying to focus on, to keep the lines moving. And that doesn’t mean that it necessarily it would be that many hours that will be added but we are still evaluating that as well. So when you look at it, probably the one, we already have table service in, so that’s part of what we have got in labor today that you are seeing us roll over. Then in the 60% that Clifton mentioned, you are now going have the exempt, non-exempted going to hit by December 1 and forward and we are still evaluating obviously the full time equivalent.

Operator

Thank you. Our next question comes from the line of Karen Holthouse from Goldman Sachs. Please go ahead.

Unidentified Analyst

This is actually [Greg Roman] for Karen today. Couple of quick questions. The first one is a follow up on the promotions question. Just wondering if there are any mismatches versus prior year that we should be aware of for the third quarter.

John Jordan

So on the third quarter for July, our promotion, the biggest thing probably is, is we did introduce the barbeque sandwich last year. We obviously are running that again this year in July but certainly a difference between when you initially do it versus the second time. In August last year, we did a two sausage and egg for $3.50. We also had the continuation of our barbeque sandwich and then we had the smoked sausage at $1.29 that we added sort of in middle of August. This year we are running a Cajun Fillet biscuit or sandwich combo for $5 and we are running the 32 ounce tea for $1. So we are running that, which obviously is a pretty big discount compared to the regular price of the tea, which that would have been at regular price last August.

Unidentified Analyst

Thanks. And then in the last quarters' call you guys mentioned that the promotional environment. I think it was a bit more of an issues for comps in the store productivity in the adjacent versus the core markets. Just wondering if that’s still the case? Is that gap consistent? Getting better or getting worse?

John Jordan

So it think probably, if you look at it, I think the adjacent markets are still impacted more than the core markets and I think we have mentioned this before. If you look at three of the last five full fiscal years, our adjacent markets have outperformed our core markets in comparable restaurant sales. However, in fiscal 2015 and the first half of '16, the core has outperformed the adjacent markets. And so I think that part of that is attributable to the promotional environment but I also think part of that is our adjacent markets I think are impacted more by cannibalization from our new restaurants. There is a bigger impact in the adjacent then there is in the core.

Operator

Thank you. Our next question comes from the line of Jeff Farmer from Wells Fargo. Please go ahead.

Jeff Farmer

Shifting topics on you guys to the balance sheet. So looks like the long-term debt level continues to fall pretty quickly. I am curious how we should be thinking about debt repayment in coming quarters and even interest expense. Any color there would be helpful, John.

John Jordan

So on the balance sheet, when you look at it, we paid down $33.2 million on our term debt in the last year, basically. And for right now, our intent is to continue to pay down debt with our excess cash flow. I am sure at some point in time, we are going to set a threshold that says, we are comfortable with this leverage level and then we will have other options that we can look it. From an interest perspective, right now we are paying LIBOR plus 225, so we are basically at about 2.7% on our term debt. We do have about $125 million of that swapped and so some of those swaps start to fall off but once it falls off, I think starting in '17, and one I think goes all the way to sometime in 2019. But our swap expense is up a little bit because we added a swap last year. And our applicable rate is down a little bit and LIBOR is up.

Right now, who know what's going to happen going forward. We sort of expect those rates to sort of remain where they are. I mean they go up a quarter, here or there, but we think that it will sort of stay there and then we continue to pay down that a little bit and hopefully interest expense will come down some over time.

Jeff Farmer

Okay. I will leave it there. Just, actually last one. CapEx, I know it's not a big number for you guys but any finer point you can put on that for us for '16?

John Jordan

I think right now you know we would sort of still stick in that cash CapEx of about 12.5 million to 13.5 million this year. One thing that we are doing now, I think we had mentioned before is while we are still using obviously our build to suit on almost all of our restaurants, we are doing a couple of land leases now here that we are going to look to do in areas where we can't do a built to suit lease, but that’s factored into the 12.5 million to 13.5 million. And then we also have capital leases on our equipment for the new restaurants which is non-cash but needs obviously to be factored in for depreciation and interest for our capital leases.

Operator

Thank you. Our next question comes from the line of David Palmer from RBC Capital Markets. Please go ahead.

David Palmer

Question on innovation. I think you mentioned that you have a big new product coming in the next few months. Have you tested that product in market and did you see a meaningful incremental lift from that

Clifton Rutledge

Yes. We did. I mean what we are seeing is, again, it's an extension basically of our lines already. It's not like we are adding like a pizza or hot dogs but there are several items that are in test, especially for next year, is where we will go in. But the ones that you are going to see, has been tested and it proved out the bigger part of it for me and for all of us is that whatever it is, that it will not cannibalize, introduce trading off for one thing, going to the next. The good thing about it is, it was an add. So we are excited about that, I am looking forward to it. As far as we go forward, I am more bullish on that as we go in '17 and '18 because we are building a pipeline for our restaurants, we are building that same pipeline which our company just has not done that for many many years. And we are excited about what's going to be coming over the next 18 to 24 months.

David Palmer

My follow up is about that. On the innovation front and the menu strategy in general...

Clifton Rutledge

Maybe from an LTO perspective going forward and [indiscernible] is white on the menu then we will take gladly take a look at that but most of it will be from an LTO in and out.

David Palmer

And are you looking to move beyond chicken increasingly or are you focusing on...?

Clifton Rutledge

No. It's in the sandwich line, balls and salads. Those are the three things that we are focusing on right now. We saw such a good lift from our fish sandwich last year, which again from a lunch perspective really helps. So that sandwich platform we are looking at building on and balls, whether that is breakfast balls or balls throughout the other dayparts. And then the third leg of that will come later which will be our salads for, is enhancing our salad offerings that we have today.

Operator

Thank you. Our next question comes from the line of Andy Barish from Jefferies. Please go ahead.

Andy Barish

Thank you, guys. You have answered all the ones that I could think off. Thank you.

Operator

Thank you. Our next question comes from the line of Sharon Zackfia from William Blair. Please go ahead.

Sharon Zackfia

So I almost second Andy's motion but I do have one question. I just want to be really clear on the margin guidance because obviously there is implicit downward pressure on company-owned margins in the back half of this year. I just want to be crystal clear that that does not include any incremental price that you might take. I think you said you are going to make a decision maybe in September, October?

John Jordan

It basically has very little price in it right now, so it would have -- normally when we take pricing around thanksgiving and so it's hardly none. And so we are actually looking at is obviously doing it more, maybe around the end of the third quarter beginning of the fourth quarter.

Operator

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.

Clifton Rutledge

Well, I just want to thank you all very much for today and for tonight. We ask you have a great evening and again thank you for being interested in our company. We look forward to talking to you next quarter. You all have a blessed evening.

Operator

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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